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Income Taxation Protects the Rich and Hurts the Poor

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Statists love to tell us how the income tax helps the poor by taxing the rich and equalizing wealth. That’s just sheer nonsense. For one thing, most of the money they take from people with income taxes is used to fund the welfare-warfare state, very little of which actually ends up in the hands of the poor. Moreover, to the extent that the money does end up in the hands of the poor, it accomplishes nothing more than making them dependent on government largess rather than making them independent, self-sufficient individuals.

There is something else to consider here: Income taxation actually helps the rich and hurts the poor.

Think of large, rich, well-established businesses. Sure, most of them have competition but the competition is usually limited to other big, rich, well-established businesses. While new upstart firms certainly do pop up to compete against the well-established firms, the income tax necessarily limits the number of such new upstart firms.

Imagine life without an income tax, the type of life that our American ancestors lived for the first 150 years or so of America’s existence. Everyone would be free to keep his own money. That would mean that millions of Americans today would have a nice nest egg by which to start new businesses or invest in new businesses.

For example, let’s say that libertarians had succeeded in ridding our nation of the income-tax scourge 20 years ago. Let’s assume that the average family pays $20,000 a year in income taxes. That would mean that lots of families would today have $400,000 plus interest in the bank. That’s enough to start a new small business. Combined with the savings of others, it’s enough to start a new big business. All those new businesses would be able to compete against the already established firms by providing consumers with better products and better services.

That’s one of the big things we don’t see when it comes to income taxation — the businesses that don’t come into existence owing to the fact that people have had their money taken from them by the government. Lots of poor people would be among those starting those new businesses, especially if minimum-wage laws were repealed, enabling them to hire people at whatever wage was agreed upon. Those new businesses would provide the poor with the opportunity to have meaningful employment in society, as compared to a life of welfare-state subsistence.

It’s true that in many cases income taxation prevents the rich from becoming richer, but so what? At least the big, well-established firms know that income taxation is also impeding the ability of newcomers to enter the market with the aim of out-competing the big, well-established firms.

So, while income taxation might prevent the rich from getting richer, it also helps them to maintain their privileged status in society by inhibiting new competitors who might well attract consumers away from the well-established firms.

Is income taxation necessary to equalize wealth? Well, the first question is: Why in the world does wealth have to be equalized? Isn’t that simply enshrining “Thou shalt not covet” into the tax system? What difference does it make if some have more while others have less, especially if people’s wealth is legitimately acquired — e.g., by providing goods and services that other people are willing to purchase.

Second, there is another factor to consider here, one that statists never even think about in their quest to equalize wealth through income taxation. That factor is this: The key to rising standards of living, especially for the poor, lies in increased productivity. The more productive people are in society, the better off everyone is, in terms of higher wages and lower prices for goods and services.

How does a society achieve higher levels of productivity? Through capital — better tools, equipment, machinery, and the like — which makes workers and companies more productive.

How does a society acquire more capital? By increasing the level of savings in society. The more savings, the more capital.

How does society acquire more savings? By taxing people less. Ideally, by abolishing the income tax, which frees everyone up to keep everything they earn.

Thus, the more savings, the more capital. The more capital, the more productivity. The more productivity, the higher the standard of living. The higher the standard of living, the better off most everyone is.

Thus, abolishing income taxation would be great for everyone, especially for the poor, but with one exception: The big, wealthy, well-established firms who would lose the privileged position in society that income taxation affords them.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.